Understanding MIP in HUD Multi-family Loans
For individuals seeking multi-family financing, it is imperative that you know as much about FHA multi-family loans as possible. Often referred to and abbreviated as MIP, Mortgage Insurance Premium is a unique element associated with FHA Multifamily loans. The FHA, also known as Federal Housing Administration, is a division within the United States Department of Housing and Urban Development (HUD). Originally created to help revitalize the housing marketing after the Great Depression, the purpose of the FHA is to provide mortgage insurance on loans made by FHA-approved lenders. These approved lenders are most likely banks or private lenders.
What are the FHA and HUD?
It is very easy for one to become confused or overwhelmed with names such as FHA and HUD. In actuality, it is quite easy to distinguish between these two. The FHA can insure both single family and multifamily properties. In the multifamily commercial industry, these loans are commonly known as HUD loans. Keep in mind that HUD is not the lender; in fact, they are only the insurer of the loans. To put it simply, mortgage companies that originate and offer the loans are the lenders; meanwhile HUD (through the FHA) ensures that the loans meet a specific criterion, which will ensure a borrower qualifies for credit from the federal government.
What is MIP?
Another important point to understand is that HUD does not generate revenue from the interest acquired through the loan; however, they will need to collect a premium, similar to that of any insurance company. After all, the general principal behind insurance is that numerous individuals or companies contribute a small amount to guard against any unforeseen accidents, as well as losses. The same principal is applied to the premise with HUD insuring multi-family loans. Due to this necessity, the MIP was created.
In the commercial multifamily side of FHA, the current structure is that the MIP lasts for the duration of the loan, as well as having a fixed rate. The amount of money a borrow will be required to pay declines over time because the MIP payment is based on the outstanding principal balance of the loan. As the FHA multi-family loan begins to amortize, the principal balance declines. As a result, the MIP payment will decline as well.
What are the Benefits of FHA and HUD Loans?
Unfortunately, many potential borrowers often shy away from FHA because of the MIP. This apprehension comes as no surprise because people want to minimize the amount of money they will be required to pay. While certainly understandable, many potential borrowers are uninformed about the benefits of Mortgage Insurance Premium. Here are some of the benefits involved with HUD multi-family loans:
- HUD loans include interest rates below conventional rates by .5% – 1%.
- Secondly, HUD loans are non-recourse loans, which mean only the property, can be used as collateral.
- Thirdly, the Debt Coverage Ratios (DCR) will be lower and Loan-To-Values (LTV) are higher than other commercial multifamily loans. This means multifamily investors and developers can reduce their own exposure while maximizing their cash on cash returns; as a result, they can preserve capital for additional projects thus allowing them to control more real estate.
- Finally, HUD loans also have the longest fixed rate terms available, up to 35 – 40 years.
For more information regarding Mortgage Insurance Premium (MIP), as well as FHA and HUD multi-family loans, contact the experts at Hunt Mortgage Group today!